Case Study of the Week
This case study is based on actual trades using the strategies taught by the team at Options Money Maker. Our focus is to teach traders a consistent and conservative approach to trading credit spreads, debit spreads and other combination spread strategies to earn higher than average returns.
We believe that there is no better manager of your money than you, armed with the education and experience to create great returns and do it with peace of mind. We also believe that there is no better way to learn than to “mimic the masters” and then actually do it yourself! These case studies are designed to be a supplement to your education and show you real examples of the trades we open, close and adjust while minimizing risk, eliminating fear and growing a big account.
We at Options Money Maker often deploy a vertical Call Credit Spread under certain market conditions. This is a downward bias position. This case study involves SPX when it was trading at 2010. Our traders opened a 2030/2035 Call Credit Spread and received $1.75 credit.
What is the logic behind this trade…?
This type of downward bias position realizes its maximum profit when the position is out-of-the-money at the time of expiration. In this case we wanted the index to remain below 2030. We built buffer into the position by opening it 20 points out-of-the-money in the event that the index moved upward. We normally don’t wait until expiration to close the position. We take reasonable profits of 10-20% when available and reinvest the cash in a new position. Taking profits is always a good thing and so is using the power of compounding. We built plenty of time into the position (so we thought). The problem is that the market does not always follow the identified bias in a predictable time frame. We know with 100% certainty that this index will eventually go down, we just don’t know when.
What Happened Next…?
With one week to expiration the SPX had continued to increase and was now trading at 2070. We suggested to our traders that they should roll the position out to create more time and to roll it up to a higher strike price to increase the likelihood for a profit. Many of our traders added 4 weeks of time to the position and increased the strike prices to 2055/2060. When factoring in the cost of this change which was $.75, we now were still left with a reasonable credit of $1.00. We increased the probability of making a profit because our strike prices were only 15 points out of the money.
It’s Great to Have Choices…
We are now monitoring this trade and will close it for a profit in the event that the index moves down as anticipated. If it does not move down and we need to buy additional time, we could very likely roll the position out farther in time and still maintain a small credit. The idea is to keep the position alive and well positioned while waiting for the market to eventually move as anticipated. Do you know what to do when the market is not cooperating with a trade?
There was no one right answer in this case. There are other management techniques that can be employed. The decision each trader makes is based on their personal views and attitude towards risk. This case study points out the need to learn how to think like a trader versus just following a set of rules. Want to make a profit on a high percentage of trades and manage unfavorable trades from a loss to break-even or an eventual profit? We sure do! How about you?